Data Analytics Software Corporate Reporting Practice

Data Analytics Software CR Practice Question 3 Copyright © ICAEW 2021

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Data Analytics Software

Corporate Reporting

Practice Question 3

2021 exams


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1.1 Background

Practice Questions 3 and 4 are designed to bridge the gap between Practice

Questions 1 and 2 (which are not exam standard) and Practice Questions 5 and 6,

and the Corporate Reporting mock exams (which are fully exam standard).

You should only attempt this Practice Question having studied the Explanatory

Guidance Notes for the data analytics software and having attempted Practice

Questions 1 and 2.

Both the Explanatory Guidance Notes and the Practice Questions use the same

version of the software. They also have the same data contained within the

software, which relates to a real company, Elephant Company.

1.2 Underlying assumptions of the Practice Questions

Whilst all Corporate Reporting Practice Questions use the same software and the

same data set contained within that software, they should be considered as separate

companies.

The Elephant company provides marketing services, mainly to digital businesses

based in the UK (domestic) and the rest of Europe (overseas). However, whilst this is

the core business model for all Practice Questions, each question scenario is a

separate company and will therefore explain and develop additions to, and variations

of, the core business model.

Aside from the business model, the scenarios differ in each Practice Question in

terms of the audit risks, roles of individuals, activities, accounting problems, and

additional transactions outside the data in the software. Issues described in one

company scenario should not therefore be assumed to exist in another company in

another Practice Question.

In the real Corporate Reporting exam, the version of the software will be the same as

that in the Guidance Notes and Practice Questions, but the data contained within it

will be a different real company from Elephant.

In the real Corporate Reporting exam there will be Advance Information with 11

months of data. The full year’s data will then be provided in the exam itself. As these

Practice Questions are not fully exam standard, there is no Advance Information and

the full 12 months data is provided for each question.

There are three elements to each Practice Question:

• The question.


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• Mark plan (traditional mark plan – but with narrative references to the data

analytics software).

• Appendix - Screen shots showing the visualisations that were useful in

obtaining the answer and which support the narrative in the mark plan (but

are not part of the answer).

The software contains a series of visualisations, which you may be required to

interrogate, analyse and interpret. However, for Corporate Reporting exams in 2021

you will not be able to copy visualisations (or any other information) from the

software into your script. Therefore, the screenshots in the Appendix of each

question are for guidance only, to show how, for each Practice Question, the answer

was obtained using the software. You will not be able to replicate the Appendix of the

Practice Questions in the exam.

1.6 Dates

Elephant’s accounting year-end for the data in the software is 31 December 2018.

Each Practice Question will state an assumed date within the scenario where you are

undertaking a role in the audit of Elephant. Typically, this will be in the first few

months of 2019 (ie shortly after Elephant’s accounting year-end).

1.7 Which browser and which device?

The software works on most browsers. However, it is strongly recommended that you

do not use Safari.

If you use a laptop, some visualisations may appear slightly more compressed than

shown in these guidance notes, or may not show the full screen. It is recommended

that you do not use an iPad or other tablet or phone to access the software.


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PRACTICE QUESTION THREE (CORPORATE REPORTING)

Click below to access the data analytics software

Assume the date is 7 March 2019. Your firm is the external auditor of Elephant

Company (Elephant).

Elephant is a digital marketing company based in the UK. Elephant agrees fixed

price contracts with its customers to deliver digital and traditional marketing services

related to specific marketing projects. Each marketing project Elephant undertakes is

short term, typically less than three months in duration. Each project is assigned to a

project leader who is responsible for controlling costs and ensuring that Elephant

delivers all marketing services specified in the contract.

Project leaders record costs related to each contract in an electronic job sheet for

each contract. Contract costs include time spent by web developers working in

Elephant’s digital design studio. The standard rate at which web developer time is

recorded includes payroll costs (salary and NI) and an apportionment of Elephant’s

central overheads.

You are Lesley Mills, an audit senior on the Elephant audit for the year ended 31

December 2018. Materiality has been set at £30,000. Elephant’s general ledger has

been successfully imported into your firm’s data analytics software.

The current executive directors of Elephant founded the company and retain

significant shareholdings. Executive directors benefit from an incentive plan involving

the payment of substantial cash bonuses if 5% per annum annual growth in profit

before tax is achieved.

The Elephant board has stated that they intend to float the company on AIM in the

near future. This will provide an opportunity to raise additional capital for Elephant

and permit the executive directors to realise part of their shareholdings. The

investment bank advising Elephant has informed the directors that a profitable recent

history is essential to a successful flotation.

The audit engagement partner has identified Land, buildings & improvement within

non-current assets as a key audit risk and has asked you to look into this area. You

have identified that two accounts make up Land, buildings & improvement.

13010 Fixtures & fittings

13020 Office Equipment

Data analytics software

https://icaew21.inflosoftware.com/redirect/Exam?code=ALCRMOCK21EX


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At the planning stage, it was identified that the business environment in 2018 was

very challenging for Elephant. Management has also informed you that during the

year Elephant has developed its own website and external and internal costs have

been recognised as a non-current asset in accordance with Elephant’s accounting

policies.

You have identified the following transaction related to the capitalisation of website

development within the data analytics software.

You sent an email to Frank Wright, Elephant’s financial controller, requesting further

information regarding the nature of the capitalised website development costs. His

response is provided as Exhibit 1.

Requirements

3.1 Explain why the engagement partner identified Land, buildings & improvement

at the planning stage as a key audit risk. Use the data analytics software to

support your answer.

3.2 Identify and explain any transactions related to Land, buildings & improvement

(other than Transaction SRC006972 shown above) which may represent key

audit risks. Justify why each transaction is a key audit risk. Use the data

analytics software to support your answer.

3.3 Describe appropriate audit procedures to address the key audit risks related to

the transactions identified in 1.2 above. Set out any information and

explanations that you would require of management.

3.4 In relation to the recognition of website costs as a non-current asset shown in

Transaction SRC006972 above:

• Identify and explain relevant financial reporting issues and critically assess

the appropriateness of the proposed financial reporting treatment.

• Describe further audit procedures you should undertake. Set out any

further information and explanations that you would require of

management.

Total: 32 marks


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Exhibit 1 – Email from Frank Wright in response to your enquiries related to

capitalisation of website costs

From: Frank Wright

To: Lesley Mills

Subject: Website development costs

Our website is intended to provide two functions: Firstly, it serves as a point of

presence on the internet to showcase the type of marketing campaigns we are able

to deliver to potential customers. We have commissioned new digital photography of

our staff and facilities for inclusion in case studies illustrating what we have done for

previous customers. Secondly, we are also intending to develop a full e-commerce

suite, although this functionality is not yet operational. The e-commerce suite is

intended to enable customers to submit electronic requests for quotations and

facilitate online contract management, such as client approval of copy and artwork.

The website costs that we have capitalised relate to two types of cost:

• New photography commissioned to provide artwork for the website. This

amounted to £20,000 and had previously been expensed as incurred.

• Time spent on the project by our digital design studio web developers and

related national insurance costs. Unfortunately, when these costs were

incurred during the year no-one was sure of how to record them. So, as a

short-term measure, these costs were accumulated at the standard rate in a

pre-existing job sheet for a contract completed in 2017 for Digital Dreams Ltd.

Unfortunately, during the year an invoice was raised in error and an amount

of £75,000 was posted to 51010 Domestic sales and 21010 Receivables

Control A/c.

In the course of looking into this for you, I have identified that website costs have

been incorrectly posted to the wrong non-current asset account - 13020 Office

Equipment. Accordingly, I intend to create a new account, 13000 Intangible assets,

and post the following correcting journal with an effective date of 31 December 2018:

Dr 13000 Intangible assets (SOFP) £95,000

Cr 13020 Office Equipment (SOFP) £95,000

I have also realised that amounts recorded in respect of website development in the

year were incomplete as they omitted the payroll costs for the web administrator

responsible for the website since it went live in October 2018. To address this, I

intend to post the following journal with an effective date of 31 December 2018.

Dr 13000 Intangible assets £18,326


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Cr 71000 Admin Salaries £16,687

Cr 71005 Admin NI £1,549

In response to your question about our amortisation policy we have decided that our

policy will be to amortise all development costs on the website on a straight-line

basis over seven years.

Regards,

Frank


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Elephant Three (Mark plan)

Maximum

marks

Headroom marks

3.1 Risk of overstatement

Comparison of increase to

materiality

High risk transactions

indicated on Heat Map

Mgt incentive to overstate

and reasons

Need for estimates - high

risk of misstatement

Round sum journals

Management bias

6

8

3.2 Identification of amounts

Relationship to materiality

Analysis of entries through

Suspense a/c

Effect of entries on NCA

and Sales

Discussion of unusual

nature of entries

Identification of day and

person posting

Round numbers and equal

apportionment

7

8

3.3 1 mark for each valid

procedure related to

Suspense ‘adjustments’

5

6

3.4 (a)

Remaining credit to sales

Absorption of overheads

7

10

Marking guide


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Need to demonstrate:

- future economic

benefits

- technical feasibility

- Resources to

complete

Photography expensed if

advertising and promotion

Web administrator’s costs

should be expensed

7-year useful life not short

(b)

1 mark for each valid

procedure

Max 14 marks

7

14

7

Total

marks

39

Maximum 32

3.1

There is a risk that the accounts making up Land, buildings & improvement are

overstated.

The increase in Land, buildings & improvement in the year of £129,126 is nearly four

times materiality of £30,000.

Fixtures and fittings have increased by 109% and Office equipment by 56%.

The Heat Map for Land, buildings and improvement indicates three transactions with

significant elevated risk based on magnitude relative to materiality and frequency.

Risk of overstatement of Land, buildings & improvement is exacerbated by

management’s incentive to capitalise expenditure in order to boost reported profit.

This arises from the impact of higher profits on directors’ bonuses. In addition, higher

profit increases the probability of a successful flotation from which the directors stand

to directly benefit.


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The capitalisation of internally generated assets already identified presents high risk

of misstatement due to the need for an estimate by management of the costs to be

capitalised. The use of management judgements in arriving at an estimate leads to a

high level of risk of misstatement. The round sum nature of the £95,000 debited to

Office Equipment 13020 also suggests estimation rather than a precise record of the

amounts incurred to develop the website.

The incentives to overstate profit referred to above may lead to management bias in

the use of judgement to arrive at an estimate of website development costs for

capitalisation. The challenging business environment faced by Elephant may add

further incentives for management to capitalise rather than expense costs in order to

support reported profit.

3.2

An examination of the higher risk transactions for Land, buildings and improvement,

using the Heat Map visualisation reveals amounts debited from Suspense Account

990 as follows:

Description £

Adj Q1 Suspense 5,000



Total 25,111

Together the total of these entries approaches materiality.

An examination of account 990 Suspense indicates that these entries are, in effect,

the other side of a credit entry to sales. Each amount appears to be an

apportionment of an amount credited to sales and debited to suspense with the

narrative description ‘Correct Q1 sales’, ‘Correct Q2 sales’ and ‘Adjust Q3 sales’. It

can be seen from an analysis of 990 Suspense that the credit entries to 51010

Domestic Sales appear to be matched through the suspense account to three debit

entries of equal size to the Fixture and Fittings account within Land, buildings &

improvement and two other non-current asset accounts (13025 Office Equipment

Depreciation and 11010 Motor vehicles).

The effect of these entries passing through the suspense account is to increase both

reported sales revenue and non-current assets. As above, management has an

incentive to overstate profit.

It is difficult to construct a valid justification for these entries. One would anticipate

that the debit entry related to a credit to domestic sales would be to either cash or

receivables dependent on the nature of the sale.


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An analysis of the posting details using the Stacked Bar Charts reveals that these

entries (and those related to the capitalisation of website development) were posted

by Frank Wright on a Saturday. Journals posted on non-business days can indicate a

risk of fraud and Frank Wright may be under pressure from the directors to overstate

profit for the reasons discussed above.

The round number nature of the amounts and the equal apportionment across three

non-current asset account are also indicators of higher risk.

Thus, these entries increase the risk that Land, buildings & improvement (and Sales

Revenue) is overstated.

3.3

Entries from Suspense Account 990

Procedures include:

• Seek explanation from management as to the substance of the underlying

transactions that these entries reflect.

• Inquire as to the rationale and basis on which the amount credited to sales is

apportioned equally across the three asset accounts.

• Inquire as to why there are entries for each quarter, yet no similar set of

entries for Quarter 4.

• Identify and verify the non-current assets to which the debit entries to 13010

Fixtures & Fittings relate.

• Verify the amounts debited to 13010 Fixtures and Fittings against invoices

confirming asset purchases.

• Identify whether the journal entries were correctly authorised.

3.4(a)

Amounts still recorded in sales

The entries of Transaction SRC006972 related to website development include a

credit of £75,000 to 21010 Receivables Control A/c with the debit to 13020 office

equipment. This has reversed the incorrect entry to receivables, but sales are still

overstated by this amount.

In addition, it is probable that the expense accounts are also overstated as the costs

incurred were likely to have been posted to expenses and payables/cash also.


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Frank’s correcting journal simply transfers the capitalised amount from Office

Equipment to Intangible Assets. It does not address overstatement of sales and

expenses.

Absorption of central overheads

Since employee time is recorded in job sheets at a rate including an allocation of

overheads the amount initially recorded in receivables as related to Digital Dreams

Ltd would have included absorbed central overheads. This amount has been

capitalised in transaction SRC006972.

IAS 38.65 stipulates that general overheads, not directly related preparing an asset

for use, are not a valid component of the cost of an internally generated intangible

asset. Therefore only the direct costs related to web development can be capitalised,

ie the web developers’ payroll costs. As a result, there is a risk that the amount

capitalised as web development is overstated with corresponding understatement of

expenses.

Costs not directly related to the generation of future economic benefits.

IAS 38.21 only permits recognition of an intangible asset (whether purchased or self-

created) where the entity can demonstrate that:

• It is probable that the future economic benefits that are attributable to the

asset will flow to the entity, and

• The cost of the asset can be measured reliably.

IAS 38.57 also requires that development costs can only be recognised as an

intangible asset where the entity can demonstrate that the intangible asset will

generate probable future economic benefits.

SIC-32 – Intangible Assets – Website Costs clarifies that in the context of website

costs economic benefit is demonstrated where the website is capable of generating

revenues, including those from enabling orders to be placed. Whereas a website

developed solely or primarily for promoting and advertising its own products and

services does not meet this requirement.

Elephant’s website development costs relate to the creation of a website both for

promotion of its services and taking and managing customer orders. Consideration

needs to be given to whether the extent of the intended e-commerce functionality is

sufficient to prevent the website being considered primarily for promotion and

advertising and thus ineligible for recognition as an intangible asset.

E-commerce functionality of website not yet in operation

If it is determined that Elephant’s website is not intended to be solely or primarily for

promotion and advertising, IAS 38.57 other criteria must still be met for development

costs related to an intangible asset to be capitalised. Since Frank’s email makes


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clear that the e-commerce side of Elephant’s website is not yet in operation, the most

relevant criteria of IAS 38.57 are the need to demonstrate the technical feasibility of

completing the intangible asset, and the availability of resources to complete it. This

creates a further risk of overstatement of intangible assets and understatement of

expenses.

Photography costs

SIC-32 sets out the activities an entity undertakes in development and operation of a

website. It states that only costs related to application and infrastructure

development, graphical design and content development stages can be recognised

as an intangible asset. Costs incurred in relation to time spent by Elephant’s web

developers would be considered within this definition and thus eligible for

capitalisation. However, SIC-32 states that costs incurred in content development to

advertise and promote an enterprise's own products and services should be

recognised as an expense as incurred. SIC-32 gives digital photography of an

entity’s own products as an example of such costs. The information provided

suggests that the photography expenditure by Elephant would not be eligible for

recognition as an intangible asset. This creates a further risk of overstatement of

assets and understatement of expenses.

Intention to capitalise cost of web administrator

The web administrator’s salary and NI relate to running the website. These costs

would be classified by SIC-32 as related operating activities since they relate to the

period after the website went live. SIC-32 specifies that website costs related to

operating activities should be expensed as incurred. Therefore, Frank’s proposed

journal would lead to overstatement of intangible assets and understatement of

expenses.

Appropriate period for amortisation

Elephant intends to apply the cost model for measurement after initial recognition in

accordance with IAS 38.74. This requires a carrying amount for intangible assets of

cost less accumulated depreciation and impairment losses, if any. Although SIC-32

does not prescribe a maximum period over which website development costs should

be amortised. It stipulates that the best estimate of a website's useful life should be

short. A period of 7 years is unlikely to be considered short and seems unlikely to

represent the useful life of the current website given the pace of technological

development.

3.4(b)

Appropriate audit procedures include:

•


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• Request a listing/schedule of web developer time and costs that have been

capitalised and verify time spent against developers’ time sheets or similar

evidence.

• Identify the amount of central overhead absorption in rate applied to time spent

and calculate total amount of absorbed overhead that has been capitalised.

• Examine the detailed specifications of the website to determine whether it could

be considered to be primarily for promotion and advertising.

• Inquire of management as to the expected date that e-commerce functionality

will come into operation.

• Consider use of IT specialist as an auditor’s expert in accordance with ISA 620

Using the work of an expert for the purpose of determining the feasibility of the

e-commerce functionality and the availability of resources to complete work

outstanding before revenue generated.

• Examine a sample of photography invoices making up the £25,000 capitalised

to confirm whether or not the nature of photography makes it eligible for

capitalisation.

• Request explanation for why management had selected a period of 7 years

for amortisation.

APPENDIX TO THE ANSWER: ELEPHANT ONE

The following section explains the data analytics software screens used and the

navigation methods but is not itself part of the answer. (Note: the data analytics

software screens cannot be cut and pasted from the software into your answer in the

Corporate Reporting exam).

3.1

From Account View click on to select Land, buildings & improvement in

Financial Statements view and click CONFIRM


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Account information indicates large annual increase in excess of materiality.

Heat Map for Land, buildings and improvement indicates two higher risk entries in

the top two categories of elevated risk .


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3.2

Select two top categories of Elevated Risk (or click on relevant dots to highlight) and

click on to see transaction analysis showing three transactions other than

SRC006972.

In Stacked Bar Charts set Primary Variable to Created Weekday and Secondary

Variable to which shows vast majority of increase posted on Saturdays by Frank

Wright


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Double clicking on bar for transaction analysis shows four large entries

Click on Transaction Id to reveal double entry for Adj Q3 suspense (same for the

other two ‘Adj’ transactions) showing entry to account 990 Suspense

In Account View select Other P&L to show account 990 Suspense


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Click on to view transactions and scan to find higher value amounts previously

identified going through 13010 Fixtures and fittings

Evident that ‘Adj Q3 suspense’ credit entries totalling £33,333 are matched by debit

with narrative Adjust Q3 sales. Click on transactions ID for analysis of double entry

for this transaction. (Same can be done for similar entries related to Q1 and Q2)

Documents

Data Analytics Software Corporate Reporting Practice